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Business Tax  •  Enquiries  •  HMRC  •  Personal tax  •  tax returns  •  Taxation

‘Big data’ helps HMRC catch tax dodgers

By RJP LLP on 22 November, 2013

A recurring theme of our blogs is tax enquiries and the many initiatives being launched by HMRC to catch taxpayers who have under-declared their income or evaded tax. It is no secret that these activities are generating a lot of extra revenue for the Treasury and this article explains how HMRC has become so successful. For those facing an enquiry, it can be an incredibly stressful experience and having advised countless people in this position in the past, we cannot emphasise enough the importance of ensuring your tax affairs are in order.

Since social media use has become mainstream it has become a source of very useful information for HMRC. For example, posting photos of extravagant holidays on Facebook has been used to support allegations of discrepancies between declared income and expenditure. Even some of the ‘stars’ of 'My Big Fat Gypsy Wedding' were investigated after HMRC spotted that the money they were spending on family weddings was far in excess of their official earnings.

Currently, one of the most powerful elements in HMRC’s toolkit to help identify errant taxpayers is Connect, a new ‘big data’ IT system. This mines information by ‘spidering’ the Internet and then uses mathematical modelling to build a profile of a taxpayer and match it against what they are reporting on their tax returns. Big data is described by the authors of a new book as ‘a revolution that will transform how we live, work and think’ and propels the potential for surveillance to new heights. It has certainly transformed the capabilities of HMRC to identify potential targets on a grand scale as they previously went through everything manually using local inspectors with local area knowledge of community residents and house prices etc.

According to Accountingweb, HMRC’s Connect system cost £45m to develop and has already paid for itself, having delivered £1.4bn of additional revenues in two years.  It works by sifting through seemingly unrelated information from activity on sites like Facebook, eBay and Gumtree, matching this against property transactions at the Land Registry, company ownerships, loans, bank accounts, tax returns and employment history. This is then matched with standard ‘profiles’ of individuals based on their profession, age and other demographic information, to spot taxpayers who might be under-declaring or not declaring income. Note the emphasis on ‘might’, because in spite of having such sophisticated software to identify targets to approach, HMRC continues to make mistakes and does pick the wrong people for enquiries.

For instance, some taxpayers with unusual circumstances and genuine reasons for their tax affairs to be anomalous with the standard ‘profiles’ used by HMRC are being incorrectly targeted and finding it very difficult to prove their innocence. This is the downside of using technology to identify potential targets instead of local tax inspectors, since an enquiry is automatically triggered, regardless of whether the circumstances surrounding the situation could be explained.  When this happens, HMRC may identify a small error on a tax return, for instance, incorrectly reporting interest from savings. This may be a paltry amount in real terms, enquiries have been launched for sums as little as £50, even if the mistake was genuine and taxes are being paid. The problem is that these mistakes raise a red flag with HMRC to pursue further investigations in case there are other mistakes that amount to a tax underpayment. And this is where the stress begins for the taxpayer involved who may be subjected to a very detailed inspection of their financial affairs as a result. Unfortunately it does still seem to the case with enquiries that the taxpayer is ‘guilty unless proven innocent’.

In addition to the Connect system, HMRC also receives a lot of useful information from third parties. There are official third party sources, eg banks, letting agents and auction houses, which are obliged to provide certain transactional data to HMRC. The other route is more informal, usually from people with a grudge - ex wives, disgruntled ex employees and neighbours are all very useful sources of information to HMRC For instance it is not uncommon for neighbours to tip HMRC off about anyone they believe is unofficially trading from home.

Certain professions and business types continue to attract a disproportionate share of attention from HMRC because they are perceived as high risk. These include construction workers, hairdressers, , car salesmen, bar and restaurant owners.  Essentially any cash business will always top the list for investigation because of the perception that it is easy to under declare income.

Using a good accountant certainly reduces the chances of having a tax enquiry because they will spot whether some of the information on your self assessment is incorrect or apparently inconsistent with your circumstances. They will also identify whether you might be able to claim for additional expenses and reduce your tax liability. A common mistake for taxpayers completing their own self assessments is to omit income on a rental property, under the mistaken idea that if the property is loss making there is no need to report the income.

Weighing up the cost of having your self assessment professionally completed or doing it yourself, overall, a good accountant will save you money in the long term by ensuring your payments are accurate, made on time and that you are genuinely paying the legal minimum of tax.

If you would like help with your self assessment tax return or are facing an enquiry from HMRC please contact Anne Eager by emailing ae@rjp.co.uk

 

 

 

 

 

 

 

 

 

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